Quota Share Insurance: Slice the Risk and Share the Reward
What is Quota Share in Insurance?
Quota share is a form of proportional reinsurance where the ceding insurer and the reinsurer share a proportional amount of the premiums and losses on policies covered within the contract. Typically the ceding insurer transfers a percentage of risks to the reinsurer, and the reinsurer then covers that percentage of all losses.
For example, a 50% quota share agreement means the primary insurer cedes 50% of each risk to the reinsurer. So if there was a $100,000 loss, the reinsurer would cover $50,000 or 50% of that loss. The premiums are usually shared on the same proportional basis.
Key Features of Quota Share Reinsurance
Some key features of quota share reinsurance include:
- Proportional sharing of premiums and losses based on a percentage
- Covers all policies subject to the agreement, rather than protecting against specific losses
- Allows primary insurers to reduce exposure and increase capacity
- Simple to understand and administer
Unlike non-proportional reinsurance like excess of loss, a quota share covers both small and large losses in an even manner up to the predefined percentage level. Quota shares provide protection against frequency while excess of loss protects against severity.
Why Do Insurers Use Quota Share?
There are several key reasons insurers utilize quota share reinsurance arrangements:
Manage risk exposure – Ceding a percentage of risk to reinsurers allows primary insurers to limit losses
Increase underwriting capacity – Taking on less net risk allows insurers to write more policies
Stabilize earnings – Spreading risk helps smooth financial results over time
Obtain reinsurance expertise – Reinsurers may provide underwriting guidance and support
New or small insurers often use quota shares to leverage a reinsurer’s capacity and experience. Larger insurers use it to protect against catastrophes or volatile segments. Quota shares also allow an insurer to rapidly enter new product lines or regions.
Quota Share vs. Excess of Loss
The other main type of reinsurance is excess of loss, also called non-proportional reinsurance. Here’s a quick comparison:
Quota Share – Proportional, covers a set % of all losses from first dollar
Excess of Loss – Non-proportional, covers losses above a retention level
For example, a quota share treats all losses equally whether they are small or large. But excess of loss only applies on a per occurrence basis once losses exceed a high threshold, providing protection against severity. Insurers often use a combination of quota share and excess of loss reinsurance to manage risk. The quota share handles frequency while excess of loss protects against catastrophic or high severity losses. This balanced approach provides comprehensive reinsurance coverage.
The Benefits of Quota Share
Overall, quota share reinsurance has several attractive benefits:
- Proportional risk sharing on a clearly defined basis
- No gaps in coverage from first dollar losses
- Easy to understand and administer
- Leverage underwriting expertise of reinsurer
- Flexible – quota share percentage can be adjusted
By providing broad, proportional coverage, quota share reinsurance helps insurers effectively manage their risk and underwriting results. That’s why it remains an important tool for managing exposure in the insurance industry.